Spousal RRSPs: A Way to Pay Less Tax as a Family

Posted on January 24, 2012 by braunfinancial

Why would I contribute to a Spousal RRSP instead of or in addition to a Personal RRSP?
A personal RRSP works on the concept that your taxable income during your working years will be higher than your taxable income during retirement. When you make an RRSP contribution, you get a tax deduction. By making an RRSP contribution while you are still working, you get the benefit of not having to pay tax on the amount of money that you put into your RRSP. The tax becomes deferred until you make a withdrawal, as does the taxes on any gains that you earn while you are still in the plan.

A spousal RRSP is similar. You put the funds in on your spouse’s behalf and the contribution reduces your taxable income – which means that you get the deduction. The concept here is that when your spouse makes a withdrawal in the future, he or she will pay less tax due to his or her tax bracket being lower than yours. Your taxable income will also be lower in retirement, as you’ve shifted some of these registered assets into your spouse’s name. There are other good reasons to have retirement income in both your name and your spouse’s name. Here are a few:

After age 65, money coming out of the RRSP in the form of a Registered Retirement Income Fund or Annuity allows your spouse to gain access to the Pension Income amount, which is a non-refundable tax credit. There are two benefits to this strategy. By making contributions and splitting income early on, you set yourself up to pay less tax during your retirement, as money that would be in your name is now in your spouse’s name. Secondly, your tax rate is usually lower during your retirement than during your working years.

What are Attribution Rules?
The money that you put into a spousal RRSP is supposed to be earmarked for retirement. If a deposit is made into a spousal RRSP and the other spouse withdraws the money within three years of the deposit, the money that is withdrawn will be taxable in the hands of the contributing spouse. The CRA came up with attribution rules to keep the higher income earner from putting money in, taking the deduction, and having the lower income spouse take the money out in the following year.

Is it a Good Idea?
While every situation is unique, a spousal RRSP can be a good tool. It is useful when there is a substantial difference between the amount of income that you make and the amount of income your spouse makes. It also has a place when one spouse is enrolled in a pension plan and the other is not. If you will have tax owing this year, it makes even more sense to contribute. Spousal RRSPs are a good way to save tax now and split income during retirement.

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Benefits of RRSPs

Posted on January 6, 2012 by braunfinancial

Happy New Year!
A good way to kick off the New Year is to make sure that you’ve made plans to pay as little tax as possible when it’s time to file your 2011 tax return. RRSPs provide a great way to reduce the taxes that you owe for the previous year. You have until Feb 29th, 2012 to make an RRSP contribution for 2011. Some benefits of investing in RRSPs are:

All of the Growth is Tax Deferred
Your money grows at an increased rate since you don’t have to pay tax on the gains. The tax becomes payable when you withdraw the money.

You have the Opportunity to Split Income with Your Spouse
If your spouse is in a lower tax bracket, you can make a contribution to a spousal RRSP on his or her behalf. You would save the tax at your higher tax rate. When the money is withdrawn, it becomes taxable to your spouse at his or her lower tax rate, providing that the withdrawal happens more than three years after the last spousal deposit. The end result is that the family pays less tax overall, both now and in the future.

You are Providing a Source of Income for Your Retirement
Fewer individuals have pension plans and government benefits aren’t sufficient to maintain the lifestyle that most of us now enjoy. Did you know that those who qualify for full CPP in 2012 will receive $986 per month? However, not everyone qualifies for the full payment, since the amount you have contributed is based on your salary. The average monthly payment received in 2011 was $534. It is the responsibility of each family to make sure they can maintain their lifestyle and provide for future care.

RRSP Loans are Available
For those that want to contribute to RRSPs but don’t have the extra cash on hand, RRSP loans are available. With interest rates being so low, this is a good time to take advantage of them, if they makes sense when the rest of your finances are taken into consideration.

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Investing with Guarantees: Segregated Funds

Posted on December 16, 2011 by braunfinancial

If you’re like most people, you’ve gone to the bank do your investing. You didn’t realize that you had other options. If you weren’t interested in GICs, you were likely sold a mutual fund.

What’s a Mutual Fund?
A mutual fund is a collection of stocks and bonds that are put together into a portfolio. A fund manager and a team of analysts actively watch all the companies within the fund and make the decisions regarding when to buy or sell each company. It can also hold fixed income products like government or corporate bonds. The fund has to be run according to a given set of parameters which indicate if the fund is for a conservative, moderate or more aggressive investor. The funds are categorized by these parameters.

In most cases, when you’re invested in a mutual fund, you are actively invested in the market. You can make money if the fund does well, but you can also lose money if the fund does poorly.

How about a Segregated Fund?
Segregated funds are essentially mutual funds sold through insurance companies. You get the same active management, and in some cases the same management companies but with one big difference. Segregated funds have a way of managing your long term risk by adding a component of insurance to your investment. Let me explain.

Like a mutual fund, you can lose money if the markets go down. But, when you initially purchase the fund you get to choose how much of your money you want to guarantee that you’ll get back at a point of time in the future. You can guarantee 75% or 100% of your deposits, and the guaranteed amount becomes payable either on death or 10 or 15 years from when you opened the contract, respectively. Now that in and of itself isn’t incredibly exciting but, what does get exciting is an additional feature that allows you to reset your guaranteed level when the markets have done well. When the value of your account has gone up, you can tell the insurance company that you want that new higher level to become the new level of guarantee. If the markets subsequently go back down, you get the new guaranteed amount, after a new 10 to 15 year period. These contracts do have age restrictions for these resets, and there is also a cost for this feature. The management expense ratio, which is the fee that you pay to the fund company to manage your funds for you, is higher to account for the additional insurance protection provided by the guarantees. The insurance company is actually putting the extra money aside to ensure they can live up to their guarantee.

Preparing for the Future
Segregated funds work best with long term time horizons and can be very helpful during retirement planning, as you know ahead of time the amount of the guarantee. When timed correctly, the purchase of these funds can help protect your nest egg from an untimely down market right before retirement. Segregated funds also have death benefit guarantees to make sure that on your death, your beneficiary will receive at least all the money you deposited, less withdrawals. In addition, as segregated funds are insurance company contracts, at your death, your money passes outside of your will directly to a named beneficiary. The advantage of having your money pass outside of the will is that the money does not become subject to probate fees. You beneficiary designation is part of a private contract, so there is confidentiality around who has been named as beneficiary and how much they will receive.

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The Value of Advice

Posted on November 9, 2011 by braunfinancial

Investing is a long term process. It works best when you have a goal in mind and a professional by your side to walk you through it. Investing may feel like a rollercoaster when you go it alone, but working with a financial professional who understands the process makes it a different experience.

Your advisor should be asking you a series of questions to make sure that you both have a clear picture of what you want to accomplish. This would include both short term and long term goals, with checkpoints along the way to monitor your progress. The questions that will help this process can include variations of the following:

What the money will be used for? When you will need the money? Will you be dependant on it at a future date, such as during retirement? Other questions would be: How comfortable you are with loss? (They say that the pain of loss is much worse than the pleasure of a gain). Are there other people depending on it as well? The decisions are also best made in context of your portfolio as a whole, as well as your net worth.

Your advisor should also talk to you about how you would react to hypothetical situations like events in the news or an untimely loss. Risk and reward do go hand in hand, but it’s never good if your risk makes it hard to sleep at night. A calculated risk, based on solid information, is a lot less risky than making an uninformed decision.

Your progress towards achieving your goals can be more important to define and measure than the actual rate of return on your portfolio. By determining clear goals and checkpoints to see your progress can take much of the day to day stress of the market out of your investment experience.

Even the most solid company with stellar management will have some years that are better than others. Sometimes the movements in the market has nothing to do with the companies themselves, but are determined by the broader economic landscape, or even by major fund manager buying or selling large volumes of a particular holding. Often, the perspective that helps during a particularly scary event is ‘this too shall pass’. Everything is temporary. Keep your goals in mind, review your progress regularly and you’ll be well on your way to long term success.

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What’s in a Dividend?

Posted on October 18, 2011 by braunfinancial

As the markets turn and churn, the stock-picking advice that has resonated across the board from advisors and analysts alike has been: If you’re going to invest in equities, look for dividend payers. Choose companies with strong balance sheets that are also paying a dividend. You’ll also hear that a large percentage of the increase in the value of the stock comes from re-investing those dividends. But what does that mean? What is this dividend, where does it come from? Is there anything to guarantee that they will keep getting paid? What are you doing when you re-invest your dividends?

What is a dividend?
To put is simply, as an investor, a dividend is your share of the company profits. Corporations exist for one reason alone – to make money for their shareholders. It can be debated that corporations exist to provide a good or service, but the management of every successful company knows that once the daily business is done, their job is on the line if they haven’t turned a profit. Who are these shareholders to whom they are accountable? If you own stock in a publicly traded company, it’s you.

Where does a dividend come from?
Once the company has become profitable, the management has to make one of two choices. The first is that they can keep the money that they’ve made and say that at some point in time they will reinvest it into the company to make more money. When they do this, the funds on the balance sheet are called ‘retained earnings’. The second option is to pay it out to the shareholders. If you own stock, each share that you own will have an amount of dividend attributable to it. This makes sure that all shareholders of publicly traded companies receive the same percentage of compensation for their ownership.

Is there anything to guarantee that dividends will keep getting paid?
Unfortunately, no. Dividend payments are made when there is sufficient cashflow to pay them out. However, management knows that missing or reducing a dividend payment is looked on unfavorably by analysts and the investment community, and can be a sign that the company is in trouble. They will do everything in their power to make sure that the company is able to meet what they view as an obligation to their owners, the shareholders.

What are you doing when you re-invest your dividends?
Re-investing your dividend means you’ve indicated that, you would like to use the money to increase your ownership in the company, instead of taking a cash payment. The dividend payment is used to purchase more shares which does two things:

1) Increase the amount of dividends that you will receive in the future, as the dividend is paid out on a per-share basis.

2) Give you the opportunity to have a greater participation in the company growth, as your ownership has increased.

The decision is yours. Whether you take them in cash, or reinvest them, a dividend is a good way of receiving value in return for your investment in a publicly traded company.

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The Disability Tax Credit

Posted on October 7, 2011 by braunfinancial

Does someone you know need help doing the things that we take for granted? Or, over the past year, has age or an unforeseen event affected the way you do the necessary activities of each day? Activities like hearing, speaking, walking, feeding and dressing in the morning.

The cost of caregivers or devices to keep us going can add up. Any extra help that we can get is a good thing. Assistance in the form of the disability tax credit may be available. This credit is available to people that qualify, regardless of their age.

What’s the Credit Worth?
If you were claiming for yourself, and are eligible in 2011 you can received a non-refundable tax credit of $7,341. The credit is used to reduce your income tax payable and is not received in cash. Non-refundable means that if you don’t use some or all of it, you lose it. It can’t be used against income in future years, it can only be used in the year that you are eligible to receive it.

If you have a family member (namely your spouse, common-law partner, child, parent, grandparent, grandchild, brother, sister, aunt, uncle, niece, or nephew) that relies on you to survive and is earning no income of their own or a low income, you can make the claim on their behalf. Your taxable income would be reduced instead of theirs.

If the disabled dependant is under the age of 18, there is an additional $4,282 that may be available. This is subject to reduction based on other claimed expenses.

That would be helpful, how do I qualify?
Your Doctor (or a certified specialist) needs to conduct an assessment of your abilities. They will have to complete a Disability Tax Credit Certificate, which you would then submit to the CRA for review. The required certification form can be sent in at any point in the year – in fact, the CRA encourages it so their verification doesn’t delay processing of your income tax at tax time.

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Where did my RRSP contribution room go?

Posted on September 20, 2011 by braunfinancial

You hear a lot about saving for retirement these days. Perhaps it’s a sign of the times, with baby boomers starting the first wave of the mass retirement that will sweep across Canada in the years to come. During the last few years before retirement, people start to take a much closer look at what they’ve got. The bits and pieces of pensions, former pensions from old jobs that became locked in accounts, RRSPs, spousal RRSPs, a few non-registered accounts, and the still relatively new Tax Free Savings Account for good measure.

Among the collection of accounts, having a pension plan is a beautiful thing. But as people approach their retirement, they may try to stuff as much money as possible into their RRSP. It makes sense to do it while their income is high, since their income will be lower when it is taken out during retirement. Plus they’ll get a tax refund, which can further their retirement plans by being used to purchase more investments. But when they decide to start this cash-stashing program, they may be surprise to find out that they have very little RRSP room left. They’ve become subject to the great equalizer known as the pension adjustment.

RRSPs and the Pension Adjustment
RRSPs allow all working individuals to defer paying tax on 18% of their earned income by earmarking it for retirement. Not every Canadian has a pension plan, and those who do know that they provide a great range of benefits, depending on the type of plan. This created the need for the pension adjustment. It was determined that it wouldn’t be fair for a person who had a pension plan to also be able to stock away an additional 18% of their income on a tax deferred basis. So, in the simplest of forms, the amount that you’re allowed to contribute to your RRSP gets reduced in accordance with the amount that has been attributed to your pension plan for retirement purposes. This is subject to an annual maximum that changes every year.

A Tax Free Solution
Having that gold plated pension plan is still a very, very good thing. But you should also take it to mean that a lot of your income will be taxable income during your retirement years. Those additional dollars that you’re looking to save can be put to good use through a Tax Free Savings Account. This strategy will give you greater access to your money without increasing your taxable income during retirement.

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‘Til Death do us Part – Evaluating your Enduring Power of Attorney

Posted on September 15, 2011 by braunfinancial

Your Power of Attorney is the document that allows the person that you name the ability to make decisions on your behalf.  The type and limits of this authority are granted while you are of sound mind and can give authority to make business, medical or financial decisions. 

There have been some changes made to the Power of Attorney Act that took effect in Sept 2011.  Today we’re going to talk specifically about the Enduring Power of Attorney.  This gives the named individual authority to make decisions over legal and business affairs and will stay in effect even after you become incapacitated.

It is very important you recognize the power that is being given before naming an Enduring Power of Attorney, so you can choose an individual that will act with your best interests in mind.

First Step
The first step is going to see a good lawyer.  They will help you take an objective look at all of the assets that you have under your control, and any obligations that you may have to other people.  They’ll explain to you that your named attorney can do anything on your behalf that you would be able to do yourself, unless it’s specifically excluded in the agreement.  This can mean changing beneficiary designations outside of your will.  If the agreement gives permission, they can give money as gifts to others, to charities or even to themselves.  The only document that an Enduring Power of Attorney can’t change is your will.

Who Can be Name Enduring Power of Attorney?
In BC, anyone over the age of 19 can be named, excluding a professional health care worker or provider who is taking care of you.

Accountability of the Attorney 
Attorneys can be held responsible by any other beneficiaries or family members who feel that they are misusing their power.  This can be either as a result of an action that they took or, as an action that they failed to take.  Here’s an example.  An investment decision needed to be made and the delay of the decision led to a loss. The beneficiary can go to court and hold the Attorney personally responsible for the loss that was as a result of an action not being taken.  To mitigate some of this risk, the Power of Attorney is allowed to get help from a qualified investment advisor.

A Triggering Event
Since a lot of responsibility comes along with the Power of Attorney, it is helpful to name an event that will put the POA into effect. For example, a triggering event could be a deemed incapacity by two Doctors.  This keeps the Enduring Power of Attorney from acting on your behalf before you want them to.   Unless a triggering event is specified, the named individual has the ability to act on your behalf immediately after the documents are signed.

Rights of the Attorney
The person that you have named as your Attorney may have a change of heart after they realize all of the personal responsibility that they are taking on.  A named Attorney does have the right to resign from the position, but must take the steps to properly give notice.   Make sure that you’ve had a heart to heart with this person beforehand so they can make the decision fully informed.  This will keep you in control and give you the option to consider someone else if you first choice is not willing.

Finally, if you feel that it is your Attorney’s right to be compensated, you should state this in the agreement.  Unless it is written in, your Attorney may not be able to receive any monetary reward for the service they have provided and liability they have accepted on your behalf.

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It’s Critical

Posted on August 31, 2011 by braunfinancial

The saying goes, the best way to care for others is to care for yourself first.  It’s critical.  Think of all the people that are depending on you at any given point in time.  Spouses, children, friends, bosses, co-workers.   It occasionally feels like a circus act, with the juggling and balance required to keep everything going.

For one reason or another, we can only keep juggling for so long.  Sometimes, it’s life itself taking us down a path that we didn’t expect.  After all the wear and tear of our fast paced society, the body slows down.  Our doctor sits us down and looks us in the eye.   It’s critical.  We’ve seen it happen to others.  Priorities change in an instant and all that matters is getting better and finding a way to take care of the family.

One of the steps in a sound financial plan is opening up the discussion of how you will protect yourself and your loved ones from life’s risks.  If you were no longer able to work at your job or bring in the same level of income, what would happen to your family?  Could all the bills get paid? Would your family fall behind?  Could you deal with additional costs or lifestyle changes that an illness brings?  It’s not an easy thing to talk about.  We’re all filled with the illusion of our own immortality.  It’s uncomfortable to think otherwise.

When looking at options of how to manage the risk of a critical illness, there are really only three choices:

-Look into a temporary or permanent critical illness insurance policy and pay someone to take the risk for you.  This needs to be done when you’re healthy.  Once there are signs or symptoms that there may be trouble brewing,  it reduces your chances of qualifying and you may not be eligible for the insurance.

-Build the savings yourself. Make sure that you have enough put away to take care of a situation like this, and that it wouldn’t be putting your family into debt.  The trouble with this method is that the savings tend to get used for other unexpected expenses as they come up, and it can be hard to keep the savings at a level that will eliminate the risk. 

-Procrastinate.  This one’s the easiest to do.  Or, you can hope that the situation never occurs and that you’re one of the lucky few.   Unfortunately, this can let us down when life hands us the unexpected.

What will you do?

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It’s All in the Family Part 2

Posted on August 23, 2011 by braunfinancial

We’ve talked about how relationships of the past can create ties that last into the future.   Another example of this is spousal support.  In BC, after a legal separation, the party wanting spousal support has 2 years to make their claim.  Our system in Canada also says that payments are to be made regardless of the cause for the divorce.

When dealing with spousal support, the Department of Justice of Canada states that the dissolved marriages are divided into 2 categories: and those with children and those without.

If a couple did not have children, the length of the marriage and the difference in gross income are considered.

If a couple had children, the issue gets more complex.  If the child lives with the former partner who receives child support, part of the spousal support may include a portion to make sure that the conditions and standard of living are appropriate for that child. They look at how old the child is at the time, which helps to determine the length of time the child will be with that parent. The amount of child support being paid is also considered.  

If the partners had been married a long time, the courts will try to provide a standard of living similar to what was shared during the marriage.  Emphasis is placed on encouraging the recipient to do what they can to become self sufficient.  However, if the recipient was unemployed for a long period of time during the marriage, self sufficiency may not be possible.

There were 2 court cases that shaped the way spousal support claims are handled today.  The first was Moge vs. Moge in 1992, followed by Bracklow vs. Brackow in 1999.

In Moge vs. Moge, the husband was the primary income earner for the family. The wife stayed home with their three children and worked evenings cleaning offices. Upon their separation after a 16 year marriage, she received both child support and spousal support.  Once the children were all grown and moved out, the husband appealed to terminate support, and payments were stopped.  However, the wife appealed the court decision, claiming that due to her time given to her family, she would never be able to achieve the same standard of living that she had with her former husband.  The Supreme Court agreed, and she was awarded a continuing spousal support payment.

However, in Bracklow vs. Bracklow, the partners were together for a total of 7 years, and 3 of those were as a married couple.  She suffered from an illness and became disabled though the illness was not related to, or as a result of the marriage.  During the first 2 years of their relationship, she had paid most of the bills. After that, they split the bills until she became unemployed and he became the sole provider for the family.    Due to her illness she was unable to work, and began to receive a disability pension as she was not expected to be able to work again. As a result of the pension, it was determined that she could sustain a very modest existence.  However, she continued to pursue an equalization payment even though she was receiving a small temporary payment amount from him during the court proceedings.  A trial judge decided that larger payment should continue for 2 years after the appeal.  The Court of Appeal upheld the decision. 

This decision has since raised a series of questions with regards to spousal support.  Spousal support had previously been given to keep the spouse out of financial hardship, as a direct result of their contribution to the marriage or family.  If after a short marriage, a partner wants a support payment, how much should they receive and for how long?  If they are no longer able to become self sufficient does that become the responsibility of the previous marriage partner?  This case seems to have opened the door as precedent for more like it.  It is interesting to see how the interpretation of the law develops with the cases that are presented.  However, the harsh reality of lengthy battles around divorce and separation seem to caution us towards the penning of a solid prenuptial agreement.  As they say… if you can’t talk about it when things are going well….

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